News built for finance pros
CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.
The SEC might have lost one of its best tools for cracking down on securities fraud, but it’s hardly toothless.
Since 2010, the SEC has been able to try securities fraud cases in front of independent administrative law judges, or ALJs. On June 27, though, the Supreme Court decided in favor of the defendant in SEC vs. Jarkesy, ruling that trials before ALJs violate defendants’ Seventh Amendment right to a trial by jury. Going forward, the SEC will need to hold securities fraud trials before a federal judge and a jury.
The Jarkesy decision will make it more onerous for the SEC to try securities fraud cases, Mark Bini, a former federal and state prosecutor and a partner at law firm Reed Smith, told CFO Brew. And it may have broader implications for other federal agencies that have used ALJs, like OSHA and the EPA, he said, calling it “a case that [CFOs] should watch with interest.”
The SEC came prepared: The Jarkesy ruling likely won’t “hamstring the SEC that much,” Bini said, because the agency anticipated the verdict and was already moving more of its cases into federal court. “While the SEC used ALJs routinely in the past, in recent years, they’ve brought their actions before Article III [federal] judges almost exclusively,” Bini said.
But, he noted, the ruling might slow down the SEC’s prosecution of securities fraud. Preparing for a jury trial, he said, is much more “resource-intensive” than bringing a case before an ALJ.
And cases that come before juries are less likely to come out in the SEC’s favor. The agency’s “success rate in front of ALJs was close to 100%,” Bini said, and it’ll “have a much tougher path in front of an Article III judge.” Juries, Bini said, “introduce a litigation risk that tends to be higher” than trying a case before an ALJ: “There’s much more of a contest.”
The SEC will have to pick its battles: The upshot, Bini said, is that the SEC will likely be more selective about which securities fraud cases it chooses to try. It may opt, he said, to concentrate its resources on cases it sees as bigger or more important. Though it’s too early to know the full impact of the Jarkesy verdict, “this would appear to be potentially a business-friendly decision,” Bini said.
Though the impact of the Jarkesy decision on the SEC “is going to be somewhat blunted,” Bini said, as it was limited to securities fraud cases, its ramifications could be far reaching. He and other commentators have speculated that the use of ALJs by other agencies will be called into question as well.